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Risk appetite, carry trade and exchange rates
Ming-Hua Liu1; Dimitris Margaritis2; Alireza Tourani-Rad1
2012-01-14
Source PublicationGlobal Finance Journal
ISSN1044-0283
Volume23Issue:1Pages:48-63
Abstract

Using exchange rate data from four different countries (time zones), we examine the relationship between the Yen exchange rate against major currencies (i.e. USD/JPY, EUR/JPY, GBP/JPY, AUD/JPY and NZD/ JPY) and measures of risk appetite (i.e. the S&P500 index, Dow Jones Industrial Average index and the VIX index). Our results show that the equity indexes, especially the Dow Jones Industrial Average, play a more important role in the determination of the Yen cross rates than VIX. The popular carry-trade currencies, i.e. NZD/JPY, AUD/JPY and GBP/JPY, are more affected by the US equity market than USD/JPY and EUR/JPY. While the long-term relationships are consistent across the four different time zones, the short-term dynamics are different. We find that the response of NZD/JPY, AUD/JPY and GBP/JPY to changes in the US stock market is much greater in the New Zealand and Australian zones than in the UK or US. Although the short-term relationship between exchange rates and the equity index is quite strong, the error correction speed is very sluggish. We also find evidence of asymmetric adjustment in the response of exchange rates to changes in global risk aversion. Carry trade currencies tend to appreciate gradually when conditions are favorable but fall sharply when market risk increases.

KeywordRisk Appetite Vix Jpy Carry Trade Exchange Rate
DOI10.1016/j.gfj.2012.01.004
Language英语
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Document TypeJournal article
CollectionPersonal research not belonging to the institution
Faculty of Business Administration
Corresponding AuthorDimitris Margaritis
Affiliation1.Faculty of Business and Law, Auckland University of Technology, New Zealand
2.The University of Auckland Business School, University of Auckland, Owen G Glenn Building, 12 Grafton Rd, Auckland, New Zealand
Recommended Citation
GB/T 7714
Ming-Hua Liu,Dimitris Margaritis,Alireza Tourani-Rad. Risk appetite, carry trade and exchange rates[J]. Global Finance Journal,2012,23(1):48-63.
APA Ming-Hua Liu,Dimitris Margaritis,&Alireza Tourani-Rad.(2012).Risk appetite, carry trade and exchange rates.Global Finance Journal,23(1),48-63.
MLA Ming-Hua Liu,et al."Risk appetite, carry trade and exchange rates".Global Finance Journal 23.1(2012):48-63.
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